Delaware Court of Chancery Holds That Merger Was Fair And Reasonable Despite Mishandled Conflict Committee Appointment
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  • Delaware Court of Chancery Holds That Merger Was Fair And Reasonable Despite Mishandled Conflict Committee Appointment
     
    03/02/2021
    On February 15, 2021, Chancellor Andre G.  Bouchard of the Delaware Court of Chancery entered post-trial judgment in favor of the defendant-general partner of Regency Energy Partners LP (“Regency”) in a class action brought by Regency’s limited partners alleging breach of the partnership agreement (“Partnership Agreement”) and of the implied covenant of good faith and fair dealing.  Dieckman v.  Regency GP LP & Regency GP LLC, No.  CV 11130-CB, 2021 WL 537325, (Del. Ch. Feb. 15, 2021).  The Court held that, notwithstanding inaccurate proxy disclosures about the independence of the conflicts committee, Regency’s merger with Energy Transfer Partners (“ETP”) did not violate the Partnership Agreement’s requirement that the deal be fair and reasonable to the partnership, and that plaintiffs failed to establish bad faith, willful misconduct, or damages. 

    In 2015, Regency merged with ETP (“the Merger”).  During the Merger, a director of an affiliate company of ETP was also appointed to Regency’s conflicts committee, which violated the Partnership Agreement’s “bright-line provision” that prohibited a committee member from serving on an affiliate’s board.  Accordingly, the Court held that the general partner breached the implied covenant of good faith and fair dealing by allowing Regency to misdescribe the director as independent in the proxy statement.  This conclusion exempted the Merger from two safe-harbor provisions in the Partnership Agreement that would otherwise have protected the Merger from judicial review. 

    Next, the Court analyzed the general partner’s approval of the Merger and concluded that the transaction met the “fair and reasonable” standard required by the Partnership Agreement.  To determine whether the Merger was fair and reasonable to Regency unitholders, the Court employed Delaware’s entire fairness doctrine, including imposition of the burden of proof on the defendant to prove that both the price and the process of the Merger were fair.  The Court considered the “intertwined” elements of fair dealing and fair price, ultimately concluding that the Merger was fair and reasonable based on the totality of evidence presented.  Among other things, the factual record showed that Regency and ETP’s unit prices accurately reflected each company’s value, ETP did not manipulate Regency’s unit price, the Regency directors maintained their independence throughout the Merger negotiations, and the market reacted positively to the Merger, corroborating fairness to Regency.

    Finally, the Court held that plaintiffs failed to establish damages.  The Court determined that the directors did not intend to violate the Partnership Agreement by appointing a conflicted director, nor did they commit fraud or execute the Merger in bad faith.  To the contrary, the record showed that the members of the Conflicts Committee believed that the Merger was in the best interest of Regency.  As such, the Court concluded the general partner was not liable for monetary damages and found that, in any event, plaintiffs failed to establish damages because their expert used an “apples-to-oranges” comparison at odds with established Delaware precedent. 
    CATEGORIES: Demands on Boards, Standard of Review

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